Whether you’ve been in debt, filed for bankruptcy, experienced an unfortunate circumstance, or made a grave financial mistake, your credit score might not be where you’d like it to be. But don’t worry—there’s always the chance to rebuild your credit. It won’t happen overnight, but by creating a system and committing to it, you can begin on the path to success. Here’s a quick guide on how to rebuild credit.

Understanding credit scores 

Whether you’re well-versed in your credit score or are just learning about this for the first time, let’s recap it so you can better understand how to rebuild credit. 

Credit scores are a three-digit number used by lenders to figure out how likely you are to repay what you borrow. Regardless of the company (TransUnion, Equifax, or Experian), your credit score is calculated using the information in your credit report, which includes payment history, outstanding debt, credit age, types of accounts, and requests for new credit. 

So, what’s the importance of credit scores on financial health? In a nutshell, your financial health dictates your credit score. The higher the score, the better your financial health, and vice versa for a low credit score.

Essentially, your credit score shows creditors how strong your financial health is and how likely you are to repay a loan. Ultimately, this dictates whether they’ll offer you a credit card, loan, mortgage, etc. 

The impact of bankruptcy and debt on credit 

As previously mentioned, some reasons for a low credit score include bankruptcy and debt. What happens when you file for bankruptcy or fall into debt? Your credit score tanks, unfortunately. It’s essential to understand how filing for bankruptcy can make it hard for a customer to reestablish and obtain credit; the same goes for debt. Here’s a brief overview: 

Bankruptcy 

When you file for bankruptcy, this stays on your credit report for seven to ten years. On top of that, it immediately affects your credit score with a 100-200 point drop. A drastic reduction like that makes it tough to qualify for new credit. When you do, the terms may be less favorable, with higher interest rates and lower credit limits. Additionally, filing for bankruptcy can make it hard to rent an apartment, get a job, or even obtain insurance. 

Debt 

Similarly, when you fall into debt and struggle to get out of it, the impact on your credit score can be just as damaging. Late payments, defaults, and high credit utilization ratios lower your credit score and are considered red flags by creditors. 

How long does it take to rebuild credit? 

There is no one singular answer for this. In fact, plenty of factors influence a person’s journey to rebuilding their credit score, such as: 

• Severity of the damage: This is considered the most crucial factor; a single overdue payment will have a different impact compared to a foreclosure or bankruptcy. 

• Current credit behavior: Positive behavior can help in recovering credit. Consistently paying bills on time, reducing outstanding debt, and avoiding new negative marks can speed up recovery. 

• Types of credit accounts and their usage: A well-managed mix of credit accounts can aid in faster recovery. 

• Personal financial habits: Budgeting and monitoring credit reports for errors, further influence the timeline. 

• External factors: Sometimes unforeseeable issues beyond our control can impact the time taken for recovery. Changes in credit scoring models or economic conditions can also affect how quickly your credit score recovers. 

The period for credit recovery depends on how severe or mild each of the factors are. While each credit recovery journey is unique, there are some general time frames. 

For minor issues, like a single late payment or a small collection account, the general period is a few months to a year. When it’s a more significant issue, such as multiple missed payments or substantial credit card debt, it may take one to three years to see noticeable improvements.  

If there is severe damage like bankruptcy or foreclosure, rebuilding credit can take significantly longer, typically between three to ten years. However, the right steps taken immediately after moderate to severe credit score damage can start to show improvements within the first few years. 

Steps to rebuild credit 

Remember that there is no quick solution when figuring out how to rebuild credit. But don’t panic; there is a way to improve your credit score. Here are a few steps that can apply to any situation, no matter where you start. 

1. Review your credit report 

Before you implement a plan, review your credit report. Sometimes, a low credit score is almost entirely due to an error. It’s best to resolve this issue as quickly as possible instead of letting it sit and potentially further lowering your credit score. 

If you find an error and want to dispute it, check the credit bureau website from which you requested your report. Whether it’s TransUnion, Equifax, or Experian, each has a designated process for resolving inaccuracies.  

However, if the information is correct, take the time to review your credit report to understand how to improve your credit. These documents provide a record of your interactions with creditors, so reviewing them can help you figure out which areas need attention. For instance, if you have high credit card balances, focus on paying them down. Or, if you have an outstanding collection account, prioritize paying off that debt. 

2. Create a budget and stick to it 

Effective budgeting is key to managing your finances and ensuring that you’re making progress in rebuilding your credit. Creating a budget allows you to control your spending and direct your resources toward paying down debt.

If you’re struggling to create a budget, here are a few tips to help you kick-start one: 

1. Start by recording all sources of income and basic expenses. This will only take a few minutes and will help you understand your financial situation and where your money is going. 
2. Divide your expenses into categories such as necessities (rent, utilities, groceries) and discretionary spending (entertainment, dining out). This can highlight areas where you might be overspending. 
3. Your SMART goals at work can also apply to your personal life. Take some time to set specific, achievable financial goals, like paying off a credit card or saving a certain amount each month. Break these goals down into smaller, manageable steps with a possible timeline. 
4. Regularly review your budget once a month, or every few months, to see if you’re meeting your goals. Adjust as needed based on changes in your income or expenses. 

3. Pay bills on time 

This goes hand-in-hand with the previous step, or can even be the first step you take.  If you want to boil down the process to one idea, we think it’s timely payments. Paying your bills on time is crucial to improve your credit score. Tackling this effectively shows creditors that you’re reliable, which positively impacts your credit history over time. 

If you struggle with timeliness, don’t worry. Here are a few strategies you can pick up to guarantee that you never miss a payment:  

• Automate payments: This can save you a world of trouble. Set up automatic payments for your bills to avoid late fees and missed payments.  

• Use reminders: You can set up alerts or reminders on your calendar, clock app, or even as a post-it note. Our best tip is to ask a loved one to call or message you as a reminder. 

• Maintain a buffer: Keep a small buffer in your checking account to prevent overdrafts and missed payments. This extra cushion can help cover unexpected expenses and ensure you have enough funds until the next payday. 

• Monitor accounts: Better safe than sorry! Regularly check your account balances and statements to make sure payments are processed correctly and on time. 

4. Steer clear of new debt 

To avoid derailing your progress, it is best not to take on new debt unless necessary. It’s common to see people adding new debt (mainly to help with a prior debt) and struggling to pay another off, and then it becomes an endless cycle. 

Additionally, when applying for a new credit account, your score can drop temporarily (thanks to hard credit checks). 

Instead of falling into this loop, focus on the foundations of your finances. If you’re struggling to budget, work with a trusted financial partner to help you manage your expenses. 

5. Rebuilding credit cards 

Whether your issue stems from having no credit history, leading to a low score, or other problems, consider a secured credit card to help rebuild your credit. How? Using credit cards correctly can help rebuild your credit score and show creditors you can manage credit. Here’s what you should do to effectively rebuild your credit using credit cards: 

• Choose the right credit card 

No matter if it’s your first card or if you’re rebuilding your credit, apply for a secured credit card or one designed for those with poor credit. These cards often have lower credit limits but can still help you improve your credit score when used responsibly. 

For thorough details, call your bank or a trusted financial advisor to help steer you in the right direction. 

• Maintain low balances 

As we mentioned before, one way to boost your credit is to repay in a timely manner. To make sure you do this effectively, it is recommended to keep your credit utilization ratio below 30% of your total credit limit.  

If this sounds like a foreign concept, think of it this way: if you have a $1,000 credit limit, you should try to keep your balance below $300. That way you pay it off, and you’re mindful of how often you use your credit card. 

Hint: According to creditors like Capital One, paying off your card balance as soon as you make a purchase helps. This keeps your available credit high, and your credit utilization ratio lower. Any tips to nudge your credit scores higher is one worth considering. 

• Pay in full 

No matter how high or low your balance is, you absolutely must pay it in full. Avoid carrying a balance by paying off your credit card balance each month. Doing so prevents interest from building up and helps you avoid accumulating more debt. 

• Regularly review statements 

As with every step of this process, review your statements. When you receive (or request) a credit card statement, check it for discrepancies or fraudulent charges. 

If anything is unfamiliar or if there’s an issue, address it at the soonest to make sure nothing negatively impacts your credit. 

Kick-start credit recovery 

When figuring out how to rebuild credit, it’s natural to feel overwhelmed and get discouraged along the way. The path to rebuilding credit is challenging and requires patience, persistence, and commitment. However, the effort is worth it. A healthier credit score can open doors to better financial opportunities, lower interest rates, and a more secure financial future. 

If you’re in debt, we’re here to help. At Clarity, we understand the struggle of debt and credit recovery. Our team will work with you to create a personalized plan to get out of debt and build your financial foundation. With the right support and guidance, you can go far. 

To learn more about how we can help guide you on the path to financial freedom, send us a message.

Disclaimer: The information provided in this article is for general informational purposes only and is not intended as legal, financial, or professional advice. Clarity Debt Resolution Inc. (“Clarity”) does not guarantee any specific outcomes, and results may vary based on individual circumstances. Clarity complies with all applicable laws, including the California Debt Settlement Services Act, and recommends consulting with an attorney or financial advisor before making any financial decisions. Clarity is not responsible for the accuracy of external links or content, and all website content is protected by copyright laws. We reserve the right to update or remove content at any time without notice.